Fall 2010

The big cynic

How hard can it be to prove Wall Street wrong?


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SCOTT JONES
"We expected really bad stuff, and it went above and beyond our expectations." — Vincent Daniel '94

Vincent Daniel ’94, the investment guru who foresaw the 2008 implosion of the financial industry, views the markets with the practiced eye of a cynic. Daniel takes little at face value and needs time to crunch the numbers before forming his own opinion on stocks and bonds.

“To be in the business of investing, a cynical eye toward everything is required,” says Daniel, a partner in FrontPoint Partners, which focuses on the financial-services market. “It’s a talent, it’s just in you, the ability to go on that initial gut instinct and say, ‘I don’t believe you.’”

Daniel, 38, was one of the naysayers who understood the shaky underpinnings of the real-estate bubble and invested millions on the assumption that the mortgage market would collapse. He is one of the heroes in The Big Short, Michael Lewis’ best seller on the subprime mortgage crisis. The book details Daniel’s fact-gathering forays to Las Vegas and Orlando, Fla., where up to 7,000 lenders and associates went to conferences to tout their financial products, inadvertently showing the ugly underbelly of an industry that made the debt of normal Americans a commodity that was bought and sold on Wall Street.

The loans were risky, with variable interest rates that started low and then rose sharply in subsequent years. The loans were bundled, sold as mortgage bonds and blessed with AAA ratings by Wall Street rating firms. The booming subprime business grew from $30 billion a year in the mid-1990s to $625 billion in 2005 at a time when the escalation in real estate prices masked the risky loans.

Daniel, who earned his degree in accounting at Binghamton, had read the fine print of the bond offerings and found troubling news, especially when real estate prices began to level off in 2006.

“Toward the end, we [at FrontPoint] understood how it worked, and we were shocked how deep-rooted an evil it was for the entire system,” he recalls. “We expected really bad stuff, and it went above and beyond our expectations.”

The collapse of the market took down several renowned Wall Street firms — Lehman Brothers went bankrupt. Bear Stearns was sold to JP-Morgan Chase, and AIG, the insurance giant that backed many of the mortgage bonds, teetered on bankruptcy until the federal government rushed in to rescue it.

The meltdown provided a windfall for the hedge fund managed by FrontPoint Partners, which had invested in credit-default swaps — a form of insurance sold to traders who would cash in if the bonds went into default. In the buildup to the collapse, FrontPoint executives made no secret in financial circles of their belief that the subprime market was on the brink.

“So many brokerage dealers were tied into this house of cards,” Daniel says. “We were trying to tell the world what in the world was going on, but no one wanted to listen.”

Ahead of the curve

Daniel’s prediction on the subprime market came as no surprise to Meredith Whitney, who heads the Meredith Whitney Advisory Group in Manhattan. She has known Daniel since he arrived in Manhattan’s financial world from Binghamton in the mid-1990s.

She shared an office with him at Oppenheimer, the brokerage firm where Daniel got his start.

“He has one of the best accounting minds around,” she says. “He’s willing to delve deeply into the numbers and grasp complexities that would intimidate others. He’s often way ahead of the curve.”

It was Whitney who connected Daniel and author Michael Lewis as he tried to make sense of the most recent example of Wall Street’s excesses. Daniel says Lewis, his favorite nonfiction writer, has a knack for getting it right, recalling his first book, Liar’s Poker, which recounted the extravagances of Wall Street in the late 1980s.

“In the first few pages of The Big Short, Lewis says I was young, handsome and fit,” Daniel says. “How could I be upset about that?”

Daniel, who commutes to midtown Manhattan daily on the Long Island Railroad, grew up in Kew Gardens, Queens. His mother was a comptroller at a midtown brokerage firm where he’d stop by to visit. He’d also strike up conversations with traders at company picnics.

“I was bitten by the excitement of it,” says Daniel, who lives in Syosset with his wife, Christine, and their children, Sophia, 5, and William, 1. “It felt like it was something I wanted to do.”

At Binghamton, he chose accounting for the solid foundation it would provide for working in finance. His education continued outside the classroom at his fraternity, Zeta Beta Tau. There he says he learned the art of communication in the social sphere.

“The guys were animated characters with great personalities,” Daniel says. “I learned how to read personalities and be successful through my ability to socialize and communicate. Those skills are essential on Wall Street.”

He landed an internship at the end of his junior year with the accounting firm Arthur Andersen, which hired him after he graduated. He soon discovered he didn’t like the work, and quit.

Raising red flags

Daniel sent his résumé to Oppenheimer and Co., where he was hired by Steve Eisman, the legendary Wall Street figure with whom he has partnered for nine of the past 14 years, including the past six years with FrontPoint Partners.

Daniel’s job was to see if the numbers added up to what Eisman thought was happening with subprime mortgages. Their analyses were at times brutally frank and occasionally ruffled the feathers of Oppenheimer executives. In one instance, the executives weren’t happy when Eisman and Daniel opined against buying an initial public offering sold by their own company.

“We thought it was a house of cards,” Daniel says.

He left Oppenheimer in 2001 to start his own financial research firm, but left after Sept. 11, 2001, for Keefe, Bruyette & Woods Inc.

By 2004 he was back with Eisman, who had established a hedge fund of investments in the financial industry, which later came under Morgan Stanley’s corporate umbrella. It was a good move for Daniel, who says he likes making a living by taking risks.

While mutual fund managers will only invest in stocks they believe will rise in value, hedge fund managers can go either way, betting their investments on stocks that will go up or down. This means a hedge fund manager can make money in any type of market, if he’s any good.

“I work in an industry where you are going to be wrong a lot,” Daniel says. “If you are right 60 percent of the time, you are doing really well. And I really have very little to complain about.”